Settlement Agreements UK: Your Rights Explained

What this document is

A settlement agreement is a written contract between an employer and an employee (or former employee) that settles potential or existing employment claims. In the past these were known as compromise agreements, and you may still see that older label in some paperwork.

The key feature is that the employee gives up the right to pursue specified legal claims, often including unfair dismissal, discrimination, breach of contract, and unpaid wages, in return for something of value from the employer. That something is typically a termination payment, but it can also include an agreed reference, continuation of benefits for a period, or contractual variations.

For the agreement to effectively waive statutory employment claims, it must meet strict requirements set out in legislation. One of those requirements is that the employee receives independent advice from a relevant adviser on the terms and effect of the agreement. Without that advice, the waiver of statutory claims is not legally effective, and the employer cannot rely on it.

How to use this document

1. Take the offer seriously, but do not rush. When a settlement agreement is put in front of you, you are entitled to reasonable time to consider it. The Acas Code suggests a minimum of ten calendar days in most cases. Read everything carefully before responding, and avoid signing anything in the meeting itself, even if you feel pressured to do so.
2. Understand what claims you are giving up. The agreement will list the claims being waived, often in extensive legal language covering unfair dismissal, discrimination, whistleblowing, redundancy, and more. Make sure you know what you are releasing, because once signed, you generally cannot change your mind or bring those claims later, even if new information comes to light.
3. Check the financial terms line by line. Look at the termination payment, how much is being treated as tax-free (the first portion of genuine compensation for loss of employment is often tax-free up to a statutory limit, though you should verify the current figure), notice pay, holiday pay, bonuses, shares or options, and pension contributions. Errors and omissions at this stage are common and costly.
4. Scrutinise the restrictive covenants and confidentiality clauses. Many agreements include post-termination restrictions, non-disclosure terms, and clauses preventing you from making derogatory comments. These can affect your ability to work elsewhere or speak about your experience. Consider whether they are reasonable and whether they can be softened through negotiation.
5. Obtain independent sign-off from a qualified adviser. The agreement is not binding as a waiver of statutory claims until you have received independent advice from a relevant adviser who signs the certificate at the back of the document. Employers typically contribute towards the cost of this advice, and that contribution should be stated in the agreement itself.